BCTIA Response to Federal Support of R&D
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BCTIA Response to Federal Support of R&D

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BCTIA letter to Tom Jenkins, Chair, Expert Panel on R&D, regarding federal support to research and development.

BCTIA letter to Tom Jenkins, Chair, Expert Panel on R&D, regarding federal support to research and development.

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BCTIA Response to Federal Support of R&D BCTIA Response to Federal Support of R&D Document Transcript

  • February 17, 2011Mr. Tom JenkinsChair, Expert Panel on R&D1200-270 Albert StreetOttawa, ON K1A 5G8via email: consultations@rdreview-examenrd.ca Re: Review of Federal Support to Research and DevelopmentDear Mr. Jenkins:The BC Technology Industry Association (BCTIA) is pleased to participate in the Expert Panel’sReview of Federal Support to Research and Development in Canada, and we respectfully attachour comments.In preparing our remarks, we have opted not to undertake a broad consultation with ourmembership. Instead, we have chosen to rely on a number of studies and consultations that wehave undertaken in recent years, including an extensive 2007 study on the SR&ED.1 Our analysisand conclusions have been further validated with industry representatives from across BC’stechnology industry.While BC technology companies utilize a number of federally funded programs, we have limitedour analysis and recommendations in this submission to our Big 3 – SR&ED, NRC-IRAP and WD.However, other vertically-oriented or lifestage programs including Precarn, STDC and NSERC arealso critical complements to the R&D ecosystem. For instance, SDTC, a support programtargeted at clean technology projects, has proven extremely beneficial to British Columbia. Ithas not only provided critical financial support, but has also helped to leverage this federalfunding by attracting private and provincial funds. Such strategic investments like SDTC areessential to build and maintain the competitiveness of Canadian companies in key sectors withinthe technology industry.The BCTIA welcomes this review as an opportunity to improve the longstanding supportmechanisms in place today. Programs such as SR&ED, IRAP and others are used extensively bythe technology industry, and many of our companies have built this support into their businessmodels.1 http://www.bctia.org/files/White_Paper/BCTIA_SRED_Consultation_Paper_-_Nov_30_07.pdf
  • –2–When reviewing public policies for growing Canada’s innovation economy, two issuesconsistently arise: access-to-capital and access-to-talent. Canadian companies are chronicallyunderfunded, yet our rich lifestyle makes Canada a great place for top global talent to reside.Canadian support for R&D helps to de-risk technologies, improving the potential for investmentwhile stretching the limited cash that our companies have. At the same time, capacity-improvement projects help organizations such as the BCTIA create and manage programs tobuild the talent base within our communities.With respect to the federal support programs for R&D, the following are some of our high-levelrecommendations.SR&ED 1. Eliminate ownership structure as a criterion to determine cash refundability. 2. Extend the SR&ED program to include early commercialization activities or supplement the SR&ED program with a parallel system to support commercialization. 3. Introduce mechanisms to favour companies that show evidence of commercialization success. 4. Streamline processes and ensure consistent application of policies and regulations.NRC-IRAP 5. Increase the IRAP budget for more direct support of R&D and innovation. 6. Introduce larger-scale grant categories using funding stages with competitive processes to qualify applicants. 7. Increase IRAP’s ability to build regional R&D and innovation-support capacity.WD 8. Further emphasize WD’s mandate of long-term capacity building versus short-term project funding. 9. Improve the transparency of the funding process and eliminate the requirement for ministerial sign-off on all funding projects.Because the programs reviewed are key components of our ecosystem, any changes should beexecuted carefully to ensure that businesses can adapt in an orderly way. Small start-upcompanies, which constitute the majority within our industry, can ill afford sudden changes.These companies are often cash-strapped and lack the managerial bandwidth to implement newrules and regulations quickly. Changes must be made in a predictable way.We also recommend caution regarding the use of Business Expenditures on R&D (BERD) tomeasure the impact of R&D support programs in R&D-intensive industries such as technologydevelopment. Mature technology companies typically spend less of their budgets on R&D thanstart-up companies because more money is spent monetizing the R&D created through productsales, implementation and support. Within the consultation document, the use of BERD is
  • –3–focused too heavily toward R&D activities and not enough on the commercialization activitiesthat actually capitalize on the R&D created in order to scale companies and create export wealthfor Canada.On behalf of the BCTIA and our colleagues across BC’s technology industry, we thank the Panelin advance for its efforts. We welcome the opportunity to further discuss these issues andrecommendations with the Panel, and with the federal government in due course, and we lookforward to working with the government in their enactment.Sincerely,Pascal Spothelfer,President & CEOBCTIA
  • Review of Support to Research and DevelopmentBC’s technology industry comprises more than 8,000 technology companies. The majority are smallbusinesses, with 80% having fewer than 10 employees and only 4% having 50 or more. While many ofthese companies are service-oriented, at least 20% are product companies that spend significantportions of their funds on R&D, much of it developing products for export markets.To create their intellectual property, BC technology companies rely heavily on federal support programsfor R&D and innovation. A large number of BC technology companies use the Scientific Research andExperimental Development (SR&ED) tax incentive program, which the Province of BC further leverageswith a Provincial SR&ED tax credit. For our larger companies, the availability of SR&ED can make thedifference between maintaining and expanding their R&D activities in British Columbia or transferringthem abroad.Our companies also rely upon the NRC Industrial Research Assistance Program (IRAP) to assist with R&Dand early-stage commercialization projects. In addition, Western Diversification (WD) plays a critical rolein providing funding to help build the commercialization capacity of our region. This is important fororganizations such as the BCTIA, which works toward this goal on behalf of its members.All of these programs are essential, well-established elements of our industry ecosystem. Our commentsfocus on these three key programs because whatever changes are made will ideally enhance them tothe benefit of our industry and British Columbia’s economy overall.Scientific Research and Experimental DevelopmentThe SR&ED is by far the most important federal program for incenting industrial research anddevelopment. It is essential for the technology sector, which invests a significant percentage of itsoperating budget in R&D. Early-stage and small companies, which spend disproportionally on R&D, relyheavily on SR&ED credits and refunds to reach or support the commercialization stage.The SR&ED program positions Canada internationally as an attractive place to conduct R&D. This notonly helps to preserve existing R&D jobs in Canada, but also attracts the capital necessary to conductthese activities here.As with any program, the SR&ED can be improved. Any changes that enhance the commercial success ofR&D and increase the return on R&D investment should be considered and implemented. However,when making changes, the federal government must consider the degree to which the technologyindustry relies on the current system. Changes should be implemented without causing shocks to thesystem, or the longer-term benefits will be achieved at the cost of short- and medium-term setbacks.Key Issues 1. Extend eligibility for refundable cash credits. In today’s global era, we believe that supporting R&D in Canada is good for the country, regardless of the type of company undertaking it. R&D jobs are highly skilled and well-paid, and their existence
  • Review of Support to Research and Developmentsupports a culture of innovation. Therefore, the ownership structure of a company should not beused as the eligibility criterion for refundable (cash) tax credits. Existing rules surrounding CanadianControlled Private Company (CCPC) status are anachronistic. Without sufficient capital in Canada,companies require the ability to raise money globally without having to worry about losing theirSR&ED refunds. Refundable tax credits can be limited to R&D activities conducted in Canada withinthe existing framework, without having to discriminate against non-CCPCs.2. Increase program scope to include commercialization.The current limitation of the SR&ED program to R&D activities forgoes the scalability that occurswith successful commercialization of that R&D. For small companies and start-ups, the absence ofsupplementary or complementary commercialization incentives is problematic, as these companiesoften lack the ability to commercialize their innovation and thus generate adequate returns on theR&D investment. The result is that innovation supported by public funds is stranded or picked up byinternational firms through acquisitions. We strongly recommend (at least for start-ups and smallcompanies) that either the scope of the SR&ED incentives be expanded to includedcommercialization activities or a parallel commercialization program be established. Eligiblecommercialization expenses should include activities such as market research and validation,prototyping, demonstration projects and the establishment of sales and marketing functions.3. Focus support on successful companies.Currently, SR&ED tax credits are based on incurred eligible expenses regardless of R&D outcomes.While we recognize that the introduction of outcome criteria (outside of taxable income to applythe tax credits against) in a fundamentally formulaic tax incentive program is challenging, we believethat this could be achieved by tying the level of incentives received to evidence ofcommercialization success (i.e., sales of the developed products). Such an incentive program wouldprovide an initial support level for R&D activities on their own with increasing increments forcompanies that demonstrate commercial success. While other mechanisms are certainlyconceivable, the fundamental concept should reward technology companies for successfulcommercialization and avoid directing funds to perennial developers without evidence of economicprogress.4. Implement process improvements.The mechanics of the SR&ED program are fairly straightforward, but the complexity remains high,particularly for small companies with little management bandwidth. In addition, the CRA’sapplication of the rules changes periodically, which creates inconsistent requirements fordocumentation; changes to the expense eligibility from one reporting period to another; and cyclicalincreases of claim rejections leading to a higher number of appeals, delays and frustrations. As aresult, many companies resort to using SR&ED consultants, thereby forgoing a significant amount oftheir SR&ED benefits to cover the consulting fees and rendering the program less efficient overall.
  • Review of Support to Research and Development One of the key values of a formulaic incentive program such as the SR&ED is predictability. To truly incent, companies must be able to rely on predictable outcomes. They need to know what credits they can expect and when they can expect them. Inconsistent application of the rules by the CRA counters these benefits and can seriously affect cash planning, particularly for early-stage technology companies that often rely on their SR&ED claims as critical sources of cash.Recommendations 1. Eliminate ownership structure as a criterion to determine cash refundability. 2. Extend the program to include early commercialization activities or supplement the SR&ED program with a parallel system supporting commercialization. 3. Introduce mechanisms to favour companies that show evidence of commercialization success. 4. Streamline processes and ensure consistent application of policies and regulations.NRC-IRAP The National Research Council’s Industrial Research Assistance Program (IRAP) is the most significant direct support program for Canadian industrial R&D and innovation, and one of the few R&D programs that supports the successful commercialization of R&D as much as the R&D itself. Through its regional offices and Industry Technology Advisors (ITAs), IRAP is very well integrated into the technology sector ecosystem. IRAP’s decentralized structure allows it to make funding decisions based on its local assessment of companies and projects. While decisions are only as good as those who make them, this approach allows the use decision-making criteria that go well beyond the formulaic approach used for indirect fiscal support mechanisms. As a result, IRAP is a key partner of both companies and organizations that work toward increasing the capacity of our innovation economy. However, when reviewing IRAP, two key issues stand out:  IRAP program funding runs out quickly and is often allocated relatively early in any given fiscal year.  The amounts IRAP can practically award are typically small, often limiting IRAP’s ability to achieve the desired impact. To address these shortcomings, we would support an increase in IRAP’s budget and suggest the introduction of additional funding mechanisms to allocate these additional funds. We would also welcome the adoption of a staged approach that allows incremental contributions to companies as they move through their growth phases. Under such a system, start-ups or early-stage companies could apply for IRAP support the way they do today (mostly targeted at R&D efforts). However, once a company has completed the first stage, it could apply for a larger grant for stage two, with grants available for both R&D and initial commercialization activities. The third stage, for which companies could apply once stage two has been successfully completed, would further
  • Review of Support to Research and Development expand commercialization support. Tracking companies’ progress throughout the process would allow IRAP to collect good data on strategies and tactics that influence the success or failure of innovation and commercialization. With a staged process that focused more on commercialization, a larger part of IRAP’s budget could be allocated to successful ventures so as to support the complete continuum from innovation to commercial product. This would directly address the “Valley of Death” wherein smaller companies are not advanced enough to rely on private funding but are showing sufficient promise to warrant the support. This staged approach would be particularly effective in helping companies grow from micro businesses (<10 employees) to small businesses (>50 employees). To further help companies make it through the commercialization process, the federal government needs to increase IRAP’s ability to build regional support capacity through partner organizations such as incubators, accelerators, or other industry-initiated or provincially supported programs. Examples of such initiatives include the Accelerator Centre and Hub initiated and managed by Communitech in Waterloo, the MARS project in Toronto and the BCTIA’s Centre4Growth program. Federal support for these programs, which are designed to increase the regional capacity for successful R&D, is often leveraged by both provincial and private-sector funds.Recommendations 5. Increase the IRAP budget for more direct support of R&D and innovation. 6. Introduce larger-scale grant categories using funding stages with competitive processes to qualify applicants. 7. Increase IRAP’s ability to build regional R&D and innovation-support capacity.Western Diversification (WD) While WD does not provide R&D support directly for industry research, innovation and commercialization are key aspects of its mandate, particularly with regard to projects that build regional capacity. In British Columbia, we typically have not had the head-office presence required to develop technology business leaders, who can in turn build their own successful companies and ensure that the R&D being developed is sufficiently monetized. With our companies chronically underfunded, we also haven’t been able to buy the required talent from other jurisdictions. As a result, we have had to rely on projects that help to grow our own talent here in BC. It is in helping to develop these programs that WD has played its greatest role. However, capacity-building programs require a long-term vision, and they can’t be accomplished with short-term, one-off projects. To truly diversify the economy in BC and create a knowledge- based economy here, WD needs to focus on longer-term projects and provide funding that also includes maintenance of the capacity that we have created.
  • Review of Support to Research and Development In accordance with its charter, WD often leverages its funding by making it conditional upon third- party participation (provincial, municipal or private-sector) – an effective strategy as it increases local and regional buy-in for projects. However, in order to maintain the capacity built by these projects, we believe that WD needs to consider long-term funding agreements that continue to support capacity programs once built instead of relying solely on the other partners. With respect to WD’s effectiveness, the biggest constraints we have identified are the complexity and lack of transparency of its decision-making processes (specifically, the need to subject all funding decisions to ministerial sign-off). The ministerial sign-off process is often convoluted and lengthy. Final decisions regarding important capacity-building programs are made by people far- removed from the projects, while the influence of regional staff, who are not only familiar with the projects but also the sponsoring organizations, is reduced. Our own experiences have shown that once a project submission has been finalized, received by the regional WD office and forwarded for further approval, the submission tends to disappear within the WD hierarchy. Decisions tend to be made based on the paper trail, without further consultation with the proponent, nor, from what we understand, the regional WD office. Even WD staff are not informed as to where a proposal sits and why certain proposals are approved while others are not. While we appreciate the necessity of ministerial decisions for the allocation of large funding requests, we strongly recommend that the level of decision making be commensurate with the requested budget. We also favour a process with clear stages and timelines, one that also allows for clarifications and revisions by the proponent when requested by WD, instead of the “shoot-and- forget” approach that is followed today. WD plays an important role in building support infrastructure and programs for the technology industry in British Columbia. Its regional office is well connected and respected in the community. Enabling this office and its staff to make more decisions and have more insight into the centralized decision-making processes within WD’s hierarchy would make WD more valuable and effective.Recommendations 8. Further emphasize WD’s mandate of long-term capacity building versus short-term project funding. 9. Improve the transparency of the funding process and eliminate the requirement for ministerial sign-off on all funding projects.